Motley Fool 6/9/2013

Q: Why should I invest in stocks if they all go down with the market? There may be another big drop, so shouldn’t I get out? — G.T., Biddeford, Maine

A: Successful investors have learned that the value of individual stocks as well as the overall market will fluctuate over time, sometimes soaring or sinking sharply. Over the long haul, if you’ve bought stocks at undervalued prices, they should approach or exceed their intrinsic value.

But that can take time, which is why successful investors also need patience.

Exiting stocks makes sense if you really have little or no faith in them. But think twice about exiting in anticipation of a drop, as no one knows exactly what the market will do in the short term. You don’t want to be sitting on the sidelines for months or years, missing out on gains.

That said, if you feel sure that any holding is very overvalued, selling can make sense.

Q: If you sell a stock that you hold in a Roth IRA for a loss, can you deduct the loss when you take money out of the Roth? You can deduct investing losses in regular brokerage accounts, but what about Roths? — H.S., Galena, Ohio

A: If you follow the rules, you’ll pay no tax on your Roth withdrawals, but you’ll also get no tax benefits from losses. Since the overall long-term trend of the market is upward, though, the Roth’s benefits tend to far outweigh the costs.

For example, imagine investing $5,000 per year in your Roth and earning an average annual gain of 8 percent. In 25 years, you’d have more than $365,000, and you’d be able to take it all out tax-free! Learn more at fool.com/retirement.

Fool’s School

Match and outperform

It might seem smart to trust your money to professional mutual fund managers, letting them decide what to invest it in. But consider:

Many charge steep loads (sales fees), sometimes topping 5 percent. More standard is the annual expense fee, which is typically around 1 percent to 2 percent. Even that can significantly hurt your performance.

Many fund managers are eager to attract more investment dollars to boost their fee income. But as a fund grows bigger, with more money to invest, it’s more likely to park some in less promising investments and to have its overall performance suffer.

Fortunately, instead of ending up invested in funds that lose to the market, you can choose to match the market average. Invest your long-term money in index funds designed to track the performance of a broad market index, such as the S&P 500 or the Dow Jones Wilshire 5000.

The S&P 500 is an index of 500 leading companies in America. The Dow Jones Wilshire 5000, a “whole market” index, contains almost every U.S. stock. There are even broader indexes, such as the FTSE Global Equity Index, which includes more than 7,400 securities in 47 different countries and tracks about 98 percent of the world’s investable market value. Investments such as the Vanguard Total World Stock Index ETF will easily park you in it.

Index funds usually have extremely low fees — sometimes less than 0.20 percent (that’s a fifth of 1 percent). There’s little turnover within them, too, so commission costs are minimal.

Best of all, investing in index funds is simple, taking very little time or energy. Once you’ve invested in them, you can forget about them (ideally adding money regularly, though). However the stock market performs in the coming years, your index fund will roughly track that.

Learn more at indexfunds.com and fool.com/mutualfunds/mutualfunds.htm, or read “Common Sense on Mutual Funds” by John C. Bogle (Wiley, $20).

My Dumbest Investment

Reverse growth

My dumbest investment would be when I rolled over about $30,000 worth of retirement account money to Fidelity years ago. A perky young fellow from Fidelity strongly encouraged me to invest in its Growth Company Fund. This was back in January 2000, before so many growth stocks tanked. Ironically, I did sense that many tech stocks were due to crash and burn, but I didn’t bother to check what the fund held. I assumed that the fund managers would be smart enough to avoid damage from crashes. Sigh. — T.G., online

The Fool responds: Many professional investors as well as amateurs were stung when the market imploded. But over time, it has recovered. Many brokers and investment salespeople don’t have great track records or your best interests at heart, but others do.

The Fidelity Growth Company Fund actually has a strong long-term record. Over the past decade, it has averaged 10.3 percent annual growth, and since its inception about 30 years ago, it has averaged 12.8 percent annually. Still, you would have done well to take your own market assessment into account in your decision-making.

Incorporated back in 1907, I’m engaged in the manufacturing of vehicles (and related merchandise) and also in financial services. Warren Buffett has said that he favors companies like me that have customers so devoted that they’ll tattoo my name on themselves. I introduced my “Knucklehead” back in 1936, with a famous teardrop-shaped gas tank. My products have been used in many wars, and law-enforcement and rescue folks use them, too. My logo is a bar and shield, I have a porcine ticker symbol, and I rake in more than $5 billion annually. Evel Knievel was a fan. Who am I? (Answer: Harley-Davidson)

The Motley Fool Take

A promising transformation

DuPont (NYSE: DD) is becoming more of a science company, and that could bode well for investors.

The company has been pursuing growth opportunities that create higher value — for example, buying Danisco, a global enzyme and specialty food ingredients company, while jettisoning its performance coatings unit, a lower-margin commodity business.

DuPont’s strategy is to build and leverage its science lead in agriculture and nutrition, bio-based industrials and advanced materials. It still faces stiff competition, though, in agriculture, where it faces the likes of Monsanto and Dow Chemical.

Competition with Monsanto cost DuPont a lot in legal fees, and ended with DuPont agreeing to a $1.75 billion licensing deal with the seed giant. So now DuPont and Monsanto will collaborate as DuPont gains access to some key patents in Monsanto’s portfolio.

DuPont itself has a vast intellectual property portfolio, providing a strong base for future growth. To that end, the company has set long-term-growth targets to grow its sales by 7 percent each year while its operating earnings are expected to grow at a 12 percent annual clip.

The main knock against DuPont right now is a stock price that isn’t quite a bargain unless its growth rates rise. For maximum potential growth, consider adding the company to your watch list and waiting for a dip in price to offer a bigger margin of safety.